Macau casinos: upping stakes

Chinese high rollers are wandering to faraway cities. Fancy waterfalls and tropical pools in Macau’s VIP rooms are proving ineffective at attracting big spending whales. As a slowdown hits earnings at Macau’s casinos, including those of Melco Resorts & Entertainment, geographical diversification of the client base has become crucial. To access Australia’s high rollers, the Hong Kong-based casino operator has bought about half of James Packer’s shares in Crown Resorts for $1.2bn. That looks a winning bet for both sides. 

Mr Packer wanted to cut his 46 per cent stake in Crown. His own portfolio, too heavy in gaming, had also needed diversification. After the sale, he retains 26 per cent of Crown. The timing was appropriate as there was no guarantee another offer would emerge after US-based Wynn Resorts withdrew a takeover bid six weeks ago. 

Melco gains given it paid $164m less than Wynn’s indicative offer. With the stake it gets an edge over competitors through access to Crown’s big spenders. Melco’s net profit fell in the first quarter. Blame its heavy reliance on Macau — nearly 80 per cent of ebitda — and a larger-than-expected fall in Macau’s VIP revenue. Macau gets half of its total gambling revenues of $3bn a month from high rollers. Table limits for whales in Macau are triple that of Las Vegas and Melbourne. 

A weaker Chinese economy coupled with new gambling options in Cambodia and Australia have distracted customers. Added to the choices elsewhere in Asia, the possibility of China one day opening its own casinos in the mainland remains the biggest threat to Macau’s business. 

Buying into Crown should help Melco hedge against all these threats. Should conditions worsen in Macau, a takeover bid for the remaining 26 per cent of Mr Packer’s stake in Crown remains an option. If so, Melco could fully consolidate Crown’s earnings. Melco and Crown both win this round.

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